Sensex, Nifty Finish Strong; Banking Sector Up 1.6%

Indian share markets maintained the upbeat mood in the afternoon session supported by positive global cues along with gains in metal, auto and IT stocks. At the closing bell, the BSE Sensex stood higher by 457 points, while the NSE Nifty finished up by 145 points. Meanwhile, the S&P BSE Mid Cap & the S&P BSE Small Cap finished up by 1.5% and 1.3% respectively.

Asian markets finished mixed as of the most recent closing prices. The Nikkei 225 gained 1.45% and the Hang Seng rose 0.27%. The Shanghai Composite lost 0.21%. European markets are mixed today. The DAX is up 0.19% while the CAC 40 gains 0.11%. The FTSE 100 is off 0.12%.

The rupee was trading at 67.43 against the US$ in the afternoon session. Oil prices were trading at US$ 50.07 at the time of writing.

According to an article in The Economic Times, Public sector banks (PSBs) have written off Rs 1.54 trillion of bad loans between April 2013 and June 2016. During 2013-14, all PSBs wrote off Rs 344 billion non-performing assets (NPAs). The amount increased further to Rs 490 billion in the following year.

Banks wrote off NPAs of Rs 560 billion during 2015-16. Meanwhile, there were 661 NPA accounts above Rs 1 billion amounting to Rs 3.78 trillion from public sector banks as on March 31, 2016. As on September 30, gross NPAs of public sector banks rose to Rs 6.3 trillion as against Rs 5.5 trillion by June end. This works out to an increase of Rs 799 billion on quarter on quarter basis.

As per the reports, most of the NPAs continue to be contributed by "the usual five-six sectors" from the industry segment that have been the cause for much of the stress in the banking system for the last few quarters. Steel, power, shipping, sugar and infrastructure are the industries which have seen the maximum amount of stress in the last few years.

The government has taken specific measures like enactment of the Insolvency and Bankruptcy Code (IBC) and amendment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and the Recovery of Debt due to Banks and Financial Institutions (RDDBFI) Act aimed at improving resolution or recovery of bank loans.

The problem of bad loans is indeed quite severe and when we compare it with other global peers it looks daunting. Out of the ten major economies facing NPA problems, India is ranked seventh.

India is Near the Bottom of the Global NPA List

Further, according a leading financial daily, a comparison of the NPAs of 25 large Asia-Pacific banks shows that the large Indian banks have the worst NPA ratio when compared to their large cap peers in the region. For FY16, India has been the worst performer with NPAs of 4.6%. Thailand has been the second performer with NPAs of 3.2%.

PSB's finished the trading day on a firm note with Indian Bank and State bank of India leading the gains.

In another development, the production of tea in the country stood at 147.64 million kgs in October, a decrease of 15.79 million kgs (9.66%) over the corresponding period, due to unfavorable weather. India is the world's second biggest tea producer and exports CTC (crush-tear-curl) grade mainly to Egypt, Pakistan and the UK and the orthodox variety to Iraq, Iran and Russia.

The production of tea in North India dropped 10.69% to 129.40 million kg in October 2016 as compared to 144.89 million kg production in October last year. Tea production in South India slipped up by 1.62% to 18.24 million kg as compared to 18.54 million kg in October last year.

The production in West Bengal slipped 7.68% to 41.33 million kg as compared to 44.77 million kg last year in October, while output in Assam dropped by 12.52% to 84.72 million kg in October 2016.

Assam contributed majorly with a production 652.95 million kg of tea in 2015-16 helping the country with a highest ever tea production during the fiscal year of 2015-16. This even led to the breaching of exports mark of 230 million kg after 35 years.

Also, India's tea exports declined by 2% to Rs 20.84 billion in the first six months of the current fiscal. In the April-September period of last year, the total value of tea exports was Rs 21.24 billion.

India is the second-largest tea producer in the world after China, with over 70% of the beverage produced, being consumed in the country itself.

Sensex Continues to Rise; Tata Group Stocks Surge
01:30 pm

Indian share markets continued to trade strong during the noon session amid firm global markets. All the sectoral indices are trading in green. Auto and metal stocks witnessed majority of the buying activity.

The BSE Sensex is trading higher by 367 points and the NSE Nifty is trading higher by 118 points. Meanwhile, the BSE Mid Cap index & the BSE Small Cap index is up by 1.2% respectively. The rupee is trading at 67.87 to the US$.

According to a leading financial daily, Bharat Petroleum Corporation (BPCL) has inked a Consortium Agreement with Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation (HPCL) on December 07, 2016 to carry out pre-project activities for setting up of a West Coast Refinery & Petrochemical project of approximately 60 MMTPA capacity in the State of Maharashtra through a Joint Venture Company.

The refinery will be India's biggest refinery built at a cost of Rs 30 billion. IOC will hold a 50% stake in the project while BPCL and HPCL will have 25% each. As per the reports, Saudi Aramco of Saudi Arabia are also interested in taking a stake in the project, but nothing has been finalized as yet.

The mega west coast refinery will produce petrol, diesel, LPG, ATF and feedstock for petrochemical plants in plastic, chemical and textile industries in Maharashtra. India has a refining capacity of 232.06 million tonnes (mt), which exceeded the demand of 183.5 mt in 2015-16. According to the International Energy Agency (EA), this demand is expected to reach 458 mt by 2040.

Shares of oil exploration companies are on the rise after the Organization of Petroleum Exporting Countries (OPEC) last week agreed to cut output for the first time since 2008. However, analysts don't see a major upside as investors remain uncertain about these companies' prospects and as they do not expect oil prices to gain significantly from current levels.

The OPEC production cut will help oil prices but upside will be capped as shale gas production will start coming into the market at higher levels. Indian oil exploration and production companies have their own problems of corporate action, government subsidies etc.

In last year, shares of IOC have risen 42%, ONGC has gained 33%, Oil India has gained 13.3%, and Cairn India has surged 98%.

Share Price of IOC and ONGC in Last One Year

Moving on to news stocks in automobile sector. Tata Motors' share price is presently trading up by 3.9% after the company's subsidiary - Jaguar Land Rover (JLR) has reported its best ever November retail sales of 47,588 vehicles, up 2% compared to November 2015. The year-on-year growth in retail volumes was driven by strong sales of the new Jaguar XF (with the addition of the long wheel base XFL in China) and F-PACE as well as continuing solid sales of the Land Rover Discovery Sport and Range Rover Sport.

Jaguar Land Rover delivered solid retail sales growth across the majority of key regions for November year on year, with China (up 42%) and North America (up 20%) partially offset by softer sales in the UK (down 13%), Europe (down 6%) and in other overseas markets, which include Russia and Brazil (down 25%). Jaguar Land Rover sold 527,937 vehicles in the first 11 months of 2016, 21% up on the same period in the previous year. The Jaguar brand continues to show strong growth, primarily driven by XF and F-PACE.

Meanwhile, on the domestic front, Tata Motors snatched a small lead over Mahindra & Mahindra as the third largest passenger vehicle seller in India, in November. Tata Motors sold 12,736 units in November compared with 12,707 units sold by Mahindra & Mahindra in the same period.

Also, for the fourth consecutive month in November, Mahindra lost the country's largest utility vehicle seller status to Maruti Suzuki India. Mahindra had a tough November as most of its products sold in rural and semi urban markets took a knock because of demonetisation.

Sensex Gains Momentum; Metal Stocks Surge
11:30 am

After opening the day on a positive note, the Indian share markets continued their momentum and are presently trading in the green. Sectoral indices are trading on a positive note with stocks in the metal sector and auto sector witnessing maximum buying interest.

The BSE Sensex is trading up 366 points (up 1.4%) and the NSE Nifty is trading up 112 points (up 1.4%). The BSE Mid Cap index is trading up by 1.3%, while the BSE Small Cap index is trading up by 1.2%. The rupee is trading at 67.41 to the US$.

Indian markets fell considerably yesterday after the Reserve Bank of India (RBI) unexpectedly kept its repo rate unchanged at 6.25%. The central bank also lowered GDP growth rate forecast for current fiscal to 7.1% and admitted to short-term disruption in economic activities due to demonetisation.

Given the flagging state of industrial economy and falling consumption on the back of the demonetisation drive, market participants were expecting the RBI to cut rates by 0.25%. So the RBI's decision to stay pat on interest rates came as a disappointment for market participants.

However, that was not the case for us. Now, as you know, rate hikes and cuts never really disappoint or enthuse us. For in no way do they impact our long term views on stocks. Yes, we did expect the RBI to cut rates by 0.25% to 0.5% considering the liquidity scenario. But it seems there are reasons (which may be inflation, foreign exchange risks etc etc) for the RBI to stay cautious.

What came as disappointment for us was the fact that the RBI has not only stayed away from making its stance clear on demonetization but also failed to put its policy decision in the context of its concerns. That was usually the case with erstwhile policy statements. As our recent edition of The 5 Minute WrapUp states:

  • We knew that the withdrawal of the high denomination notes from the system was bound to create temporary uncertainty. However, amidst shortage of new notes the ad-hoc policy changes by RBI have added to the confusion.

    In times of a currency crisis, the central banker is expected to take steps to dispel the air of uncertainty and instill confidence through regular updates and plans to tide over. But the central banker chose to remain mum.

Moving on to the news from commodity markets... Crude oil is trading on a positive note today. Most of these gains are seen on the back of a fall in US crude inventories. The US Energy Information Administration (EIA) yesterday stated that US crude inventories for the week ended December 2 dropped by 2.4 million barrels.

Apart from the above, the rally in crude oil prices is seen on the back of OPEC meet in Vienna last week.

During the meet, the OPEC agreed for a production cut starting January. The organisation, which accounts for a third of global oil supply, will reduce production starting in January by 1.2 million barrels per day (bpd) to 32.5 million bpd.

As a part of the OPEC deal, Russia has promised to gradually cut its crude output by up to 300,000 barrels per day in the first half of 2017.

All eyes are now set on Russia and other non-OPEC producers that are going to meet with OPEC tomorrow.

While the above developments are final, the implementation depends on non-OPEC members such as Russia reliably committing to cut output. The decision also hinges on the speed at which American shale producers step up production.

Despite the above uncertainty, crude oil witnessed most of the buying interest during last week after the OPEC decision to cut production starting January. This trend is visible in the chart below-

OPEC Deal and Fall in Inventories Fuels Rally in Crude Oil Prices

To keep a tab on the movements in crude oil and other commodities, you can read the stock market commentary from the Daily Profit Hunter team. Their commentary tracks the developments in the global economy as well as stock, currency and commodity markets.

Sensex Opens Strong; Tata Steel Up 2.3%
09:30 am

Asian stock markets are higher on Thursday, following the record gains overnight on Wall Street and on expectations that the European Central Bank will extend its asset purchase program at its monetary policy meeting later in the day. The Nikkei 225 is up 0.82% while the Hang Seng is up 0.60%. Stock markets in Europe also closed their previous session on a positive note.

Meanwhile, Indian share markets have opened the day on a strong note. BSE Sensex is trading higher by 260 points and NSE Nifty is trading higher by 81 points. Meanwhile, both S&P BSE Mid Cap and S&P BSE Small Cap are trading higher by 0.8% respectively. The rupee is trading at 67.87 against the US$. Gains are largely seen in auto and metal stocks.

Tata Steel's share price opened up by 2.3% after the company pledged to stay in Britain with a 10-year commitment to a one-billion-pound investment plan as part of crucial talks with steelworkers' unions to save thousands of jobs in the UK.

Tata Steel offered a number of guarantees to its staff at Port Talbot steelworks in south Wales which is UK's largest steel plant, including a minimum five-year guarantee to keep both furnaces operational at the site.

Tata will next week start a consultation with its employees on a proposal to close the British Steel Pension Scheme, which has liabilities of over 15 billion pound, and offer employees a "competitive defined contribution scheme" in its place.

Industrial group Thyssenkrupp, which has long been seeking a solution for its ailing steel business, has insisted it is not prepared to take on Tata's pension liabilities in the event of a merger. Moreover, the company has made clear that its primary aim in merging with Tata is to combat overcapacity in the steel sector.

In another development, since surprise exit of Cyrus Mistry and his surprising revelations, the group has lost around 15% of their market capitalization. In numbers, the group has lost around Rs. 1.16 trillion. TCS, Tata Motors, Titan and Tata Steel have seen maximum value erosion due this event.

TCS, the Biggest Loser in the Tata Group Dispute

As the chart highlights, TCS accounts for a lion's share of the loss, with its market cap going down by Rs 534 bn, nearly half of the total loss borne by the group.

Moving on to news from stocks in telecom sector. According to an article in The Financial Express, the telecom industry is expected to take a hit of 5-7% on revenue during the next two quarters on account of demonetisation and competitive pressures, intensified by extension of free services by newcomer Reliance Jio.

At a time when the industry is already facing pressures on the operating metrics, owing to heightened competition, the extension of free services by RJio is expected to further push down the realisations in both the voice and the data segments. This comes at a time when the telecom industry is reeling under 4.25 trillion debt.

As per the report, the impact is expected to be aggravated by demonetisation which can lead to revenue loss of the telcos especially in the pre-paid segment.

In another development, the Indian telecom sector has received foreign direct investment (FDI) of US$10 billion in the first eight months of the current fiscal. The FDI which was US$1.3 billion in 2014-15, US$2.9 billion in 2015-16 has jumped up to more than US$10 billion in the first eight months of 2016-17.

At a time when the country is undergoing a demonetisation drive of higher denomination Rs 500 and Rs 1,000 notes, every day more and more people are logging into online payment modes and online banking transactions.

Telecom stocks opened the trading day on a positive note with Tata Communications and AGC Networks leading the gains.

Is Demonetisation Legal?

On the 8th of November 2016 the central government declared Rs 500 and 1000 notes illegal. It was a well-intentioned move and was much appreciated. Some even considered it an event that would bring structural changes to the Indian economy.

The government thought the unreturned money would be a dividend for the government from RBI.

However, the execution of this drastic move has brought up concerns, one could even say it has created chaos. People are plum out of cash. The economy is swiftly heading for a slowdown. Reality is turning out to be painful.

To make matters worse, the government's estimates about the unaccounted money have been completely off the mark. It was expected that a big chunk of the total Rs 15 trillion of high denomination notes would not return to the banking system. However, that number has already crossed Rs 10 trillion.

Some think demonetisation is the biggest failed economic experiment in history, and they could be right. The execution certainly has been messy, and only time will tell the long-term impact it will leave on the economy.

But, there is another serious question about demonetization we must consider...

Is demonetisation legal?

Every currency note carries the RBI's promise to pay the bearer the amount of value of the note. This pledge is signed by the honorable governor of the central bank.

If the RBI fails to do that, it is considered a default by the RBI.

Can a mere declaration by the government nullify the pledge of the RBI governor to pay? In fact, unless the RBI Act is not amended, the RBI must be liable for the old notes even after 30th December 2016.

The government and central bank want to amend the RBI Act, of course. However, this can only be done after 30th December, when we know the exact state of unreturned currency.

And as we know the ongoing parliament session ends on 16th December, leaving the central bank only the Ordinance route to amend the act.

Until the ordinance is passed, the RBI is legally bound to fulfill its promise to pay.

We believe the central bank has an important role to play in the country's current situation.

After a disappointing start by imposing the 100% CRR on fresh bank deposits.

Yesterday, in the Monetary policy meeting (MPC) RBI decided to keep the repo rate unchanged at 6.25%.

The unchanged rate does not bother us. What bother us is the way our new governor refused to talk about the demonetisation.